Copper inventories at the London Metal Exchange appear to be declining after setting five-year highs last month on a fall in demand due to the global slowdown.
On Tuesday London Metal Exchange stocks shrank by 1.3 per cent to 512,025 tons, seeing copper prices climb in New York Comex trade by 3.1 per cent to $1.68 a pound. Copper on the LME, meanwhile rose by $49 to $3,660.
Falling inventories are bullish for metal prices, and LME copper stocks have now declined for the ninth straight session — some 6.6 per cent since February 25th.
But does this have the makings of a sustained recovery? We’re not so sure.
Most traders attribute the boost in demand specifically to Chinese buying. Expectations are now running high that the Republic will definitely report an increase in copper imports for February. However, this is unlikely due to a real increase in demand from Chinese industry. More likely, it is the result of government stockpiling while prices in Europe remain cheaper than in Asia, and while dry bulk freight rates also stay low.
As Bloomberg data shows, copper futures in China climbed 5.1 per cent in the past week, while on the LME prices rose 3.7 per cent.
While traders appear cautious of being left short in a declining inventory environment, some are also beginning to wonder just how long copper demand can be supported by China in this way. As MF global highlight in their Tuesday metals report (our emphasis):
Copper is at $3665, up $54, and slightly off from its intraday highs of $3680. Stocks were off by another 6700 tons overnight, and this is managing to steady the complex somewhat. Moreover, canceled warrants are holding steady at 10% of the overall stock total, (although down slightly from the 12% noted last week). Much of the recent decline in stock levels is likely part and parcel of the Chinese government buying program. At one point, the “bullets” being fired by the Chinese government in this regard, i.e., buying metal for its own account, will come to an end, in which case copper prices could prove vulnerable.
Related links:
The Baltic dry marches on, for now – FT Alphaville
A deflationary dragon – FT Alphaville